Startup Strategy
What is a strategy?
This is a surprisingly confusing question, and something that puts people off thinking about strategy.
A strategy is the process of identifying, building, and defending a sustainable competitive advantage.
This makes it different from a lot of valuable things we spend time doing in startups. For example, building a product customers want to use, selling it to people, making money, raising and allocating capital, and increasing the value of the company. All of thesetasks we might need to do well as part of our strategy.
You can have success without a strategy, and it may even last for a while. But strategy is the coherent thinking and plan that drives towards sustainable success.
Does strategy matter in early stage startups?
Do early stage startups need to think about strategy, is it even possible for them to?
Early stage startups are often a process of discovery, the search for a high growth business of some kind. If we don’t yet know what we’re building, and even how it makes money, does anything matter except shipping and achieving product-market fit?
YCombinator is heavily focused on executing on the product fast - “talk to your customers, build something they want, keep shipping fast.” It makes sense, because this comes first in the process, without some kind of product-market fit, you are going nowhere.
But it’s worth trying to adopt a strategic mindset early, to avoid building the wrong business.
An example of a business with explosive product market fit and growth is Clubhouse. During the pandemic lock downs it exploded in usage to millions of weekly users, a valuation of $4 billion.
But ultimately it had no defensible position in the market, growth and usage slowed, and other apps copied it’s core features.
We see this with many current AI companies, explosive growth, high churn, no defensibility from copying or model companies.
The Secret Tesla Motors Master Plan”
One of my favourite examples of a startup strategic plan is the “The Secret Tesla Motors Master Plan”
People at Prolific got sick of me referencing this, but whatever else, Musk is a master of first principles thinking.
In can be written in a page, and summarised to 4 key points:
Build sports car
Use that money to build an affordable car
Use that money to build an even more affordable car
While doing above, also provide zero emission electric power generation options
Don't tell anyone
Simple, a clear communication tool to rally the company, and supporters behind. Yet still very hard to execute.
Sources and Types of Sustainable Advantage
Sustainable competitive advantage can arise from several sources, including:
Unique resources or capabilities: Patented technology, proprietary processes, or specialized expertise.
Strong brand identity: Brand reputation and customer loyalty that are hard to replicate.
Superior access: Exclusive access to resources, suppliers, or distribution channels.
Cost leadership: The ability to offer lower prices due to operational efficiencies.
Differentiation: Offering unique products, services, or experiences valued by customers.
Michael Porter’s frameworks are often used to analyze and develop these advantages
“in order to be a successful company, being active in an attractive industry alone is not enough: you will need to acquire a dominant competitive position by choosing among three generic strategies: Differentiation, Cost Leadership and Focus.”
Positioning, differentiation and competition
A great way to think about strategy is through positioning. Defining how your company is perceived in the minds of your target customers, especially in relation to competitors. It answers the core questions: Who are you as a company, what do you offer, and why should customers care?
I’m a fan of Obviously Awesome by April Dunford, which gives some great ideas about how to follow a process for choosing your positioning in a market.
There’s a push and pull element for market positioning. However too many startups allow themselves to drift to a market position, rather than thinking about where they want to live.
One reason to think about positioning is to avoid competition. As Peter Thiel said, "Competition is for losers," it's better to go where you are the only one, to build a monopoly rather than fight in a crowded market.
Instead of fighting for scraps in existing markets, businesses should create and own new markets.
As Napoleon put it “Let me choose the ground on which to fight, and I will win the battle."
One reason Prolific succeeded, was because we had no direct competition in the Academic market, for several years, allowing us to get far ahead before copycats emerge. And to use this as a springboard to more competitive adjacent markets.
This is even truer in the AI world - if you are doing what 15 competitors are also doing, how are you intending to win?
Defend and attack, there’s only one way to beat them…
Many forms of defensibility arise from making good choices about the business model.
Examples are network effects, platform effects, partner integrations, regulatory, sales/services lockin, proprietary data etc.
This is a nice outline of some of the approaches from Elad Gil, angel investor and author of one of my favourite scaling up books, the High Growth Handbook.
Speed is also a form of defensibility and differentiation in itself. and in the unpredictable future market of new AI startups, it might be the only approach you have. Still you want to be wary of rapidly building a commoditised, low margin business, or you’re not going to like where you end up.
What to do about Competitors?
Should you care about competition? As we saw above, competition is best avoided through differentiation and creating new markets. But if you are successful eventually you will have competition and copycats.
"Know your enemy, know yourself" is a famous maxim from Sun Tzu’s The Art of War.
While you should focus mainly on your own strategy, you also need to understand the competitive landscape you are in.
In particular, is the competition existential or just the normal run of business?
What is the eventual market structure for your sector, is it winner take all, can you succeed through positioning differently from your competitors, are competitors potential partners or merger targets, are they actively trying to put you out of business, how dirty are they fighting?
wartime v peacetime
I find the Ben Horowitz wartime v peacetime framing helpful. Is your startup in peacetime or wartime, do you have the right leaders for each, how should you decision making adjust?
“Peacetime in business means those times when a company has a large advantage vs. the competition in its core market, and its market is growing. In times of peace, the company can focus on expanding the market and reinforcing the company’s strengths.
In wartime, a company is fending off an imminent existential threat. Such a threat can come from a wide range of sources including competition, dramatic macro economic change, market change, supply chain change, and so forth.”
If you are going to war you need to be clear what your strategy is to ultimately win, and build sustainable competitive advantage.
